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Asian Stocks Climb Higher, led by China and India

Market Review

World equity markets climbed higher as central bank governors and investors pointed towards a synchronised pickup in the global economy and supportive earnings announcements. The USD spot rate fell after Capitol Hill was unsuccessful in repealing the Affordable Healthcare Act, souring expectations for a subsequent plan for tax cuts or infrastructure spending. The USD weakness came amid a pickup in the Euro area economy that strengthened the common currency. Asian equities returned 4.9%.

MSCI China returned 8.4%. The market rose higher following better than expected GDP readings. Beijing reported economic growth of 6.9% in the second quarter, ahead of market expectations and reflecting stable domestic activity. The Bond-Connect programme, jointly launched by the People's Bank of China and the Hong Kong Monetary Authority, follows President Xi’s visit to Hong Kong celebrating two decades since the handover from the UK. Bond Connect enables foreign investors to buy onshore China bonds with Hong Kong market infrastructure. Bond Connect scores over the two other existing channels for accessing Chinese onshore bonds by offering investors an extremely efficient onboarding process. The arrangement also allows streamlining and integration of custodial and settlement services across both Hong Kong and the mainland.

MSCI India rose 6.6%. The government rolled out its Goods and Services Tax (GST) programme. The reform aims to replace more than a dozen federal and state levies across the country, simplifying the tax structure and ensuring greater compliance. Foreigners were net buyers over the month which strengthened the rupee, while prospects of lower oil prices also eased inflation expectations for the summer.

North Asian markets of Korea and Taiwan extended gains amid an improving global trade outlook. North Korea's missile launch early in the month did little to drag Korea’s equity performance down. MSCI Korea returned 0.9%. Korean equities also welcomed an extraordinary budget plan aimed at boosting domestic growth. MSCI Taiwan returned 0.5%. Export orders rose 13.0% in June, higher than consensus expectations and above the 9.1% growth in May. The pullback in the USD lifted ASEAN markets higher, with MSCI ASEAN gaining 2.4%. The Southeast region was led by MSCI Singapore’s 3.6% return.

Outlook

Central bankers are attempting to strike a delicate balance by gradually unwinding stimulus without sparking a repeat taper tantrum episode. Investors are increasingly concerned over missteps in global monetary policies, as the low inflation phenomenon is evident in both the US and Eurozone. The USD has seen the pullback due to concerns that the Trump administration would be unable to deliver meaningful fiscal stimulus while the ECB is confronted with a pickup in Eurozone data.

For Asian markets, this suggests that stronger dollar bias derived from fiscal policy stimulus is likely to fade as priorities for domestic policies are unlikely to change soon. The weaker dollar would loosen financial conditions, allowing Federal Reserve Chair Yellen space to manoeuvre gradual interest rate normalizing as transitory inflation appears to linger longer than expected. Yellen has stated that she is willing to rethink the pace of rate rises, but also signals that it is premature to lose faith in the Fed’s outlook that tight labour supply would lift prices. Market conditions remain benign which provides support for tighter monetary policies.

China’s economy expanded 6.9% in the second quarter, beating the government’s target due to unexpected strength in the property market. Economic surprise came on the upside given the extent of monetary tightening over the past year. Supporting the economic reading, industrial production rose 7.6% in June and 6.9% for the 1H17 from a year earlier. Fixed asset investments rose 8.6%. The data bodes positively for private sector capex amid evidence of a strong pickup in orders for domestic and export SME. Economic growth figures provide Beijing with support for greater policy maneuvering and the space to address reform.

At the National Financial Work Conference this month, President Xi called for a stronger financial stability framework with the PBOC to play a bigger role, underlining the need to control risk and tackle excess leverage. On 4 July, China’s central bank published the 2017 financial stability report. While describing the overall economic development as stable and healthy, the PBOC highlighted a list of risky areas and vowed to give more emphasis to financial risk management. In our assessment, the PBOC and other regulatory bodies will continue to pursue a more comprehensive financial regulatory structure and take pre-emptive steps towards risky areas while maintaining the balance between growth stability and financial risk management.

We highlight two key elements of India’s GST rollout: the economic and political components. While November’s demonetization did not derail the economy, the impact did soften economic momentum. We believe that GST is likely to keep the economy in a short-lived soft patch. However, a pullback in energy prices and a favourable monsoon should keep purchasing power and disposable income at an elevated level. The political component reflects PM Modi’s ongoing reform efforts which support market valuations. Together, the pickup in government revenue and expansion of the tax base should help push public spending going forward. HSBC estimates that the reform could add 0.4 percentage points to economic growth.

Strong trade tailwinds should continue to benefit the North Asian export markets of South Korea and Taiwan. The tech sector will see a renewed product launch cycle, including the iPhone 8, as well as extended semiconductor demand for DRAM memory from smart initiatives including artificial intelligence and voice recognition technology. A stable oil price environment supports ASEAN equities, alleviating pressure on fiscal deficits as many Southeast Asian economies look to withdraw legacy public subsidies. State fund reallocation becomes more critical as weakening agriculture and commodity prices place the onus on public spending for much needed infrastructure projects. Central bank interest rate cuts appear limited due to concerns about capital outflow and currency stability amid significant external risks. Hikes are unlikely until there is a sustainable recovery in investments.

Across Asia, foreign exchange reserves and capital adequacy ratios remain at healthy levels and provide sufficient liquidity, paring actions taken by global central banks when markets worry over another taper tantrum. Looking at the remainder of Trump’s first year in office, challenges remain; however, any near-term correction in Asian markets should be viewed as an attractive entry point given that the current policies implemented aim to support the medium and longer-term outlook. Low interest rates and strong corporate results are conditions for a buoyant market to be in place.

Although they are often regarded as too risky, hard-currency emerging-market corporate bonds have their attractions, including a very competitive risk/return profile. As economic fundamentals improve, investment flows into this asset class are likely to continue growing.

Further reading

WTI oil prices are down almost 10% since the beginning of July. At the beginning of August, oil prices started their longest weekly losing streak in three years. The US/China trade tensions fuelled concerns that global economic growth could slow, weakening worldwide energy demand.

With the entry into an advanced phase of the economic cycle, companies have been looking at convertible bonds with fresh eyes as a valid alternative to traditional debt instruments to finance their growth.